SUNNYVALE, Calif.--(BUSINESS WIRE)--Mar. 1, 2016--
Target-date funds are designed as a diversified, age-appropriate
investment product for all of an investor’s retirement assets, but most
participants don’t remain fully invested in them as their balances grow.1
A new report by Financial Engines (NASDAQ:FNGN), America’s largest
independent registered investment advisor2, looks at why the
majority of participants move away from target-date funds over time. It
found that investor overconfidence and a desire for greater
diversification—not lack of understanding—are behind target-date fund
misuse.

According to the report (“Not So Simple: Why Target-Date Funds Are
Widely Misused by Retirement Investors”), which surveyed more than
1,000 full-time employees with access to target-date funds in their
employer-sponsored retirement plans, only one quarter (26 percent) are
using the funds as intended. Two-out-of-three (64 percent) target-date
fund investors hold only a portion of their investments (less than 90
percent) in the funds, potentially harming their investment returns
compared to those fully invested in target-date funds. Despite moving
away from being fully invested in their target-date fund, 81 percent of
participants said that they understood that target-date funds are
diversified by design and that they knew how they worked. By investing
outside of their target-date fund, participants were seeking something
beyond what their target-date fund could offer.

“While the ‘set it and forget it’ promise of target-date funds is
appealing to some investors, most participants don’t forget it -- they
are actively investing away from the target-date fund in their
portfolios,” explained Christopher Jones, chief investment officer of
Financial Engines. “Based on behavior patterns of participants analyzed
in this research, expecting most participants to stay put in a
target-date fund over their working careers is simply unrealistic. These
findings have clear implications for the long-term ability of
target-date funds to impact retirement outcomes in defined contribution
plans.”

Overconfidence in Investing Ability Can Harm Performance

Partial target-date fund users analyzed in the report tended to be older
and overconfident in their investing ability. Sixty percent of partial
target-date fund users believed that they could “beat the market” to
achieve better investment returns than their target-date fund. Past
studies have shown that a “partial target-date fund” approach can result
in 2.11 percent lower median annual returns, net of fees, than holding
all or almost all of an investor’s retirement assets in target-date
funds.3

According to the report, participants who have added other funds to
their target-date fund had greater confidence in how their accounts were
invested compared to those fully invested in target-date funds. By
mixing target-date funds with other investments, many participants fail
to reap the full benefits of diversified, age-appropriate portfolios.

Ironically, only 23 percent of those fully invested in target-date funds
were “very confident” that their assets were appropriately invested
compared to 29 percent of those holding only part of their investments
in target-date funds and 34 percent of those not invested in target-date
funds at all.

“Prior to this research, it was easy to assume that participants didn’t
fully understand how target-date funds worked,” explained Jones. “This
research suggests that the drivers behind participant investing behavior
are more complex than a simple lack of investing education. Older
participants with higher balances require other forms of retirement help
that more fully address what they are trying to achieve.”

A Fear of Putting All Eggs in One Basket and a Desire for More
Personalized Help

While target-date funds are designed for participants to invest all of
their retirement assets in a single, age-appropriate fund, 62 percent of
partial target-date fund users cited a desire for greater
diversification and a fear of “putting all of their eggs in one basket,”
as the primary reasons for moving money away from target-date funds.
More than basic investment diversification, these partial target-date
fund users were seeking additional diversification across both
investment funds and asset managers. Fifty-four percent cited a desire
for greater personalization, especially with regard to risk, while 58
percent of those decreasing their target-date fund allocation wanted
greater personal management and advice on how best to manage their
retirement assets.

“Target-date funds tend to work well for younger investors with low
asset balances and less-complicated financial lives, while older
participants with more assets often seek the greater personalization and
access to investing professionals that managed accounts provide,”
explained Jones. “Target-date funds only address the needs of a minority
of participants. With a better understanding of how participants
actually use target-date funds, plan sponsors have an opportunity to
offer other forms of help that meet the needs of investors who are
uncomfortable investing their entire retirement nest egg in a
target-date fund.”

Financial Engines is America’s largest independent investment advisor.
We help people make the most of their money by providing full-service
financial planning, including professional investment management and
advice. Headquartered in Sunnyvale, CA, Financial Engines was co-founded
in 1996 by Nobel Prize-winning economist William F. Sharpe. We serve as
a comprehensive financial advisor for our workplace customers, and offer
help to more than nine million people across over 650 companies
(including 142 of the Fortune 500). Our unique approach, combined with
powerful online services, dedicated advisors and personal attention,
promotes greater financial wellness and helps more Americans to meet
their financial goals.

This press release contains forward-looking statements, including
statements regarding the use of professional investment and financial
planning help, which involve risks and uncertainties that could cause
actual results to differ materially. These risks and uncertainties are
outlined in our SEC filings. You are cautioned not to unduly rely on
these forward-looking statements, which speak only as of the date of
this press release. Unless required by law, Financial Engines undertakes
no obligation to publicly revise any forward-looking statement to
reflect circumstances or events after the date of this press release or
to report the occurrence of unanticipated events.